In the market for a new (or new-to-you) car? That’s great! But before you drive off to your nearest dealership, have you thought about how you’re going to pay for this new set of wheels? In this crazy world where debt is the payment method of choice, you need to know one thing: Cash is still king.
We can’t go any further without saying it: Car payments are dumb—with a capital D. That’s right, if you’re in the market for your next car, you need to know exactly how you’re going to pay for it before you ever start looking. And if you want to drive your car off the lot without worry or regret, you’ve got to march in there with cash. Trust us—when you pay cash for a car, you’ll have more buying power than you ever thought possible.
Grab a steaming hot cup of coffee and stay awhile because we’re about to show you how to pay cash for a car—and then we’ll cover why it’s the smartest way to pay. Let’s dive in!
How to Buy a Car in Cash
Buying a car can be really fun—especially when you have the cash to pay for it. But there’s a right way and a wrong way to buy a car. The wrong way includes financing, getting emotionally attached, not doing your research, and paying more for a car than it’s really worth.Dave's easiest money-saving tip: See if you're over paying for car insurance.
Now, let’s break down the right way to buy a car. Here are the five steps you should follow when you’re in the market for a new-to-you car:
1. Set your budget.
Setting your budget takes some real honesty about what kind of car you need, your season of life, and how much time you have to save. If your current ride lives in the shop every other week, you’ll need something sooner than later. Don’t worry. After you buy this car, you can take your time saving up for the next. (Trade-in value is your friend.)
But if your current car gets you from Point A to Point B perfectly fine, you have plenty of time to save for your next ride. Spend some time researching current prices on used vehicles and decide how much you want to spend. Then, break down that cost by month. That number will become your “monthly payment” (that you pay to yourself, not the bank!) and go straight to your savings account.
Let’s say you want to upgrade your clunker for a new-to-you $7,000 car. Broken up into 12 monthly payments, that’s $583 a month. And if you have two years to save, that’s $292 per month. The best part about this is that you get to make the call on these “payments” because you’re acting as the lender!
2. Save your money.
This is the hard part. If you’re not a saver by nature, this is the perfect opportunity to change your behaviors with money. And that’s where a zero-based budget comes in handy. By giving every single dollar a job to do, you’ll be able to see how much money you can save each month for your new-to-you car.
Note: Make sure your monthly savings amount is big enough to meet your goal and small enough that you’ll still be able to pay the rest of your bills. And if you’re itching to buy a new car sooner, it’s time to put your foot on the gas. Sell your stuff, get a second job, and save every penny you can until you have that cash!
Don’t worry. If you’re wondering how to make a zero-based budget (and keep track of it), we have an app called EveryDollar that will change the way you handle your money. Download the free app and start setting up your first budget today.
3. Shop for the right car.
Here’s our rule of thumb: Unless you’ve got a net worth of at least one million dollars, don’t buy a brand-new car. There is absolutely nothing wrong with a certified pre-owned car. And guess what . . . The minute you drive a new car off the lot, it turns into a used car anyway.
While buying a used car isn’t as serious as choosing your future spouse, it can feel like it. And just like with dating, you don’t want to get down on one knee until you’ve done your research. That means you need to think about your season of life (have kids?), how you’ll be using the car (play car or daily driver?), and what kind of car fits into your lifestyle and your budget. You’ll also need to research the make and model, engine size and gas mileage. Learn as many facts as you can about the car you want—including prices.
Not only will it help you narrow down the type of car that works for you and your lifestyle, it’ll help you have the upper hand when it comes time to make the purchase. You’ll want to know as much as you possibly can about the car before you ever walk into the dealership or site of sale. Sites like Edmunds, Kelley Blue Book and CarFax are really helpful in your research stage.
4. Shop at the right place.
Now that you know what type of car you’re on the hunt for, it’s time to start looking—this is the fun part. These days, there’s a million ways to shop for and buy a car. To help you get started, we’re highlighting three: buying through a private seller, an online car retailer, and independent used car dealerships. Let’s break them down.
“Honey, stop the car!” Don’t be alarmed, your husband just spotted the very car you’ve been looking for . . . in your neighbor’s yard with a “for sale” sign. You can get a great deal when you buy through a private seller. But just like anything else, it comes with some risks. Usually, this means when you buy the car, you buy the car’s problems. So, if you decide to go this route, take it to a trusted auto shop and get an inspection—before you buy it. If the seller doesn’t like that, you can always walk away.
If you want to buy through a private seller, check out sites like Autotrader, Kelley Blue Book, Craigslist and even Facebook Marketplace to find used cars in your area. Who knows, you may find the deal of a lifetime!
Online Car Retailers
Online car retailers are a great option for people who know exactly what they want and don’t like the hassle of searching for the perfect used car. They’re also helpful if you’re not as trusting of private sellers. Sites like Carvana and CarMax are great options if you want to be more certain that the car you’re buying is in good working order.
The downside to online car retailers is that there’s not much room for negotiating on price. Any car you find on a site like this will probably cost you more than it would if you worked out a deal with a private seller—so be careful not to overspend!
Independent Used Car Dealerships
Over the years, used car salesmen have gotten a bad rap. So much so that you probably picture a smooth-talking, mustached man with slicked back hair wearing a tweed suit and smoking a cigar. And while it’s good to go into a dealership with your guard up, this isn’t not a fair assumption to place on every car salesman.
If you choose to buy a car through an independent used car dealership, do your research. Do they have good reviews? Do you know anyone who’s had a successful car-buying experience with them? Ask around your community for recommendations. When you’re ready to shop, remember to arm yourself with knowledge and have the courage to walk away if a salesman is being too pushy.
5. Get an inspection.
We can’t stress how important this is. No matter where you decide to shop, you need to get any car you’re thinking about buying inspected. And if someone doesn’t agree to let you take the car to a local auto shop (of your choosing), that should be a red flag.
We should note that a private seller may not be as excited about a stranger driving off in their car before money is exchanged. In that case, you can ask them to take it to your preferred auto shop and have them get a detailed inspection for you.
Most online retailers already have pretty strict standards for the cars they sell, so you probably won’t be able to get the car independently inspected before you buy. Research the retailer’s inspection process and ask plenty of questions so you get the full picture of the car’s history. And most dealerships will let you take the car off their lot to have the car inspected yourself. (If they don’t, that’s another red flag.)
6. Negotiate a good price.
Now that you’ve found the car (and the inspection checks out), it’s time to make a deal. Why? Because you never want to pay full price for a car—especially a used car. Got it? Good.
This is where negotiation comes into play. First you have to know your budget. And second, you’ve got to do your research. And since you’ve come into the sale armed with both of those things, you’re already ahead of the game.
Remember, you have the buying power because you’re paying cash for a car. So whether you negotiate before or after you agree on an inspection, use these tips for negotiating the best deal on your next car:
- Use your research knowledge. (How does the seller’s price compare with others on the market?)
- Let them know you’ll be paying in cash (but don’t tell them how much you have).
- Ask for a deal. (Don’t be afraid to throw out a number.)
- Be quiet. (Less is more.)
- Be prepared to walk away from the deal (especially if they’re not budging).
Want more where that came from? Check out Dave’s bestselling book The Total Money Makeover for more negotiation tips and tricks.
Remember: When you walk into a car deal and flash your cash, it tells the seller you mean business. Let that cash speak for itself and watch the deal unfold before your eyes.
Pros to Paying Cash for Your Car
Next to your home, your car is probably the most expensive thing you’ll ever buy. But if you’ve always believed that car payments are just part of “owning” a car, you’re not alone. Right now, Americans are paying out the wazoo in car payments to the tune of $1.44 trillion dollars.1 Yikes—that’s a crazy amount of money!
From the looks of those numbers, it seems that most people believe having a car payment is just a way of life. But there’s a better way.
There’s a lot of bad “advice” out there that could cause you to doubt that paying cash for a car is a good thing. Trust us . . . it is. Here are six reasons why it’s the smartest move you can make:
1. You’ll avoid interest.
There’s a huge difference between earning interest and paying interest. One is your friend and the other will have you living paycheck to paycheck until pigs fly.
Paying interest on a car loan is not your friend. You’ll end up paying way more in the long run than you would if you paid cash for a car outright. Plus, if you’re shopping with a run-of-the-mill dealership, you’ll learn pretty quickly that they would rather you finance your car. (They make money on interest—pretty sneaky, huh?) Why would you want to give them more money than you have to?
In 2021, the average new car was financed for over $35,000 with an average interest rate of 4.09% and a term length of about 69 months.2 That works out to $4,336 in interest—on top of the $35,000 car loan. So that $35,000 car actually cost $39,336. Yep . . . paying interest on a car is not your friend, but it makes your lenders very, very happy.
2. You hold the buying power.
The best part about paying cash for a car is that you hold all the buying power. Sure, the seller may have the keys to the car, but the reality is that they just want to close the sale. That’s right. You can pay cash and avoid all the haggling over financing terms, loans and interest rates while the lender dangles the keys to your car (and your interest rate) over your head.
When you pay cash, you hold the power to negotiate and purchase the car on your terms. There will be absolutely nothing holding you back from hitting the open road in your new-to-you car. And when you pay cash for a car and experience that feeling of freedom . . . you’ll never want to go back.
3. There’s no monthly payment.
These days, the average monthly new car payment is $575 per month.3 That’s a hefty chunk of your paycheck right there. Car payments are a big reason why nearly eight out of 10 Americans are living paycheck to paycheck.4 Just think about how much more you can do with almost $600 extra per month!
Instead of paying that crazy amount of money for a car that can’t hold its value, why not put your money where it will increase in value? Yeah, we’re talking about investing for your future in a Roth IRA or 401(k).
If you were to invest that $575 each month for six years in good growth stock mutual funds, you’d have invested a total of $41,400 of your own money. Plus, you’d be earning interest instead of paying interest, so at the end of those six years, you’d have $58,272 (based on an 11% rate of return). If you just leave that money in your Roth IRA or 401(k) to keep growing, at the end of 30 years you’d have over $1.5 million saved for retirement without adding another dime! Now that’s the kind of interest you want in your life.
4. You set the budget.
Doing a regular budget every month (before the month begins) is the first step to making wise money decisions—especially when it comes to making big-ticket purchases like a car.
And instead of picking out a car and hoping you can afford it, nailing down a solid car-buying budget ensures you can afford it. It actually gives you the freedom to buy what you want without the fear or worry about how it’s going to affect the rest of your money goals. Why? Because you’ve already paid for it!
Plus, budgeting for your car gives you freedom to spend and the freedom to say “take a hike” when those car salesmen try to push you into upgrades. Yep—if you have $8,000 to spend on a new car, you know no one is going to talk you into spending an extra $2,000 on any shiny bells and whistles. You can only pay what you have saved. And that’s a beautiful thing.
5. Depreciation doesn’t matter.
The minute you drive off the car lot in your brand-new ride is the minute it starts losing its value. And that difference between what you paid for it versus what you can sell it for is called depreciation. Get this: A new car loses 60% of its value in just five years.5 Yikes.
But here’s a surefire way to avoid worrying about depreciation: Pay cash. Why? Because depreciation doesn’t hurt so badly if you already own the vehicle! You don’t have to worry about going upside down on your car loan or having to pay more for it than what it’s worth. Win-win!
6. The cars is yours.
Ahh, there’s nothing like driving off in a paid-for car for the first time—especially when your name is on the title. Especially when you worked hard to save up for it.
When you drive off a lot or out of someone’s driveway in a car you just paid for in cash, it just feels different. You’ll never have a car loan hanging over your head. You’ll never have to wonder if your car is worth a lot less than what you’re paying for it every month. You’ll never have to worry about what happens if you miss a payment. That’s the peace of mind that comes with buying a car in cash!
Why Car Dealers Don’t Want You to Pay Cash
You’ve probably seen some conflicting advice out there about paying cash for a car. Other sites say it’s best to save your money so you have cash for emergencies. Or they’ll say when you finance your car purchase, you can get a better deal. Seriously—don’t listen to them.
But they’re not the only ones. Car dealers don’t always love a cash buyer either. Why? Because they know they can make more money on interest when you finance through them. So even if you can pay cash for a car right now, they’d rather make more money off you with car payments.
Your salesman might speak into your fears in order to talk you into a loan too. If your budget is set at $8,000 but the nicer model could be yours for $10,000, they’ll do everything they can to get you to sign on the dotted line. It’s only $2,000 more, right? (That’s trouble talking.)
That’s why they stress the importance of having a new, reliable vehicle that can get you from Point A to Point B—without fear of breaking down in the middle of the highway. And if you’ve ever driven a lemon, poured lots of money into an old car, or been stuck on the side of the road with smoke streaming out the hood . . . you’re an easy target.
Remember, their only goal is to make the sale—the best sale possible. Most of the time, the sale that makes them the most money is one that includes financing. They’re only thinking about their bottom line, not your benefit.
Drive Like No One Else
Are you ready to pay cash for a car and live a life free of car payments? You can do it—it just takes hard work, patience and maybe even some changes to your behavior with money. Okay, that might sound like a lot. But if you take it one step at a time, you can totally get there.
Learn how with Financial Peace University. This nine-lesson course shows you the steps to save money, pay off debt, and build lasting wealth. Plus, it gets you hype to make better money moves.
Listen: You don't have to drive like the majority of people, with a pile of debt under the hood holding you back. You can drive (and live) debt-free.
About the author
Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners. Learn More.